UK's Google Tax A Preview Of The Impact New OECD Proposal Will Have

Is it possible that today’s acronym-laden, conceptually dense tax reform proposal will become one of the biggest business stories of 2015? It’s already happening.

The proposal in question is the Organization for Economic Cooperation and Development’s (OECD) Action Plan on Base Erosion and Profit Shifting. This mouthful of a plan – known in tax circles as BEPS – is a tough topic for most business people to wrap their arms around. But soon they’ll have little choice but to become BEPS experts.

Unlike Dodd-Frank or the Affordable Care Act, which were clear-cut laws enacted by Congress and signed by the President, BEPS is a series of suggestions made by a consortium of global government representatives that has no real legislative authority. At its core, BEPS lays out a series of actions designed to realign contemporary tax policy with the realities of the global economy.

For the first time ever, companies will need to file detailed tax reports in every country where they do business. Previously, companies had to show only the transaction flow from one country to another. Now, the full details of each companies’ tax payments to each country will be available globally in a standardized, shareable template. Beyond that, the new reporting guideline will require financial, sales and personnel information to help countries determine the value of the operations within their borders and how that should be reflected in taxes for that jurisdiction.

This means governments are going to share information and compare notes to make sure every company is telling a full, consistent tax story. The process for this is still to be determined, but it’s clear that this cross-referencing will put every global business under a microscope and likely trigger an unprecedented number of audits.

On the surface, you can imagine why this news sparked a flurry of stories in the trade press and launched a few whitepapers from the Big Four, but didn’t send shockwaves through the pages of the mainstream media. It’s just another reporting technicality that companies will need to comply with, right?

Not exactly. Just as Dodd-Frank didn’t make mainstream news until banks started struggling to comply with it and the Affordable Care Act was largely limited to cable TV political banter until individuals started trying to enroll, the real impact of BEPS won’t truly be realized until some of its tenets hit companies’ balance sheets.

Two weeks ago, UK Treasury chief George Osborne introduced a 25% tax on foreign companies’ profits derived from economic activity in the UK. The so-called “Google Tax” is meant to capture the tax revenue for goods and services consumed by UK-based customers in the UK. For example, under this plan Google would pay UK tax on revenue from ads that are clicked by users in the UK.

This is not inherently a BEPS initiative, but it’s got BEPS written all over it. A tax proposal like this relies on the new level of tax reporting transparency that will be required under BEPS. Before BEPS, there simply would have been no formal mechanism for tracking transactions in this way. Now, with global acceptance of the BEPS country-by-country reporting mandate firmly in place, regional tax authorities will have the infrastructure in place to enact all sorts of new tax proposals. The “Google Tax” is one of the first, but there will surely be more.

Action/Reaction

As I wrote in my last post about BEPS, the administrative impacts of the new BEPS reporting requirements will be substantial for global corporations and are likely to have an impact on everything from data collection to forecasting and annual reporting.

The level of information required for the country-by-country reporting template is much more expansive than anything that has ever been collected or reported before, and few companies are set up today to deliver that level of granularity. As the rubber meets the road for companies to start reporting this data in the real world, expect push-back in the form of lobbying efforts and business strategies designed to limit exposure to some of the most aggressive tax regimes.

The seeds of this trend have already been planted with last week’s backlash against the “Google Tax” proposal from staffing and recruitment firm CBI Group, which told the Financial Times that the new proposal would be a real concern for global businesses. John Cridland, director general for CBI was quoted:

“The legislation will be complex to apply, and if other countries follow suit businesses will have a patchwork of uncoordinated unilateral rules to navigate, which risks undermining the whole OECD approach.”

The Year Ahead

Though the ink on the OECD proposal is still wet, the ripple effects of BEPS are already starting to make waves for multinational corporations. And it’s just the beginning. Over the next year, expect debates to emerge regarding how BEPS will impact corporate revenue, whether notoriously low-tax regimes like Luxembourg and Ireland will see a shift in business activity, and the impact of increased audit activity that will undoubtedly accompany the effort.

I’m the President and Chief Operating Officer at Modernizing Medicine, a health IT company that empowers physicians with suites of mobile, specialty-specific solutions that transform how healthcare information is created, consumed and utilized to increase practice efficienc...